Chinese lockdowns dragging aluminum prices down, no respite before H2

Despite high energy prices, historically low aluminium stocks, and lockdowns in Chinese aluminium-producing cities, prices are under significant pressure from a strong US dollar, demand loss from Chinese end-use sectors and poor investor sentiment towards the metals complex.

While Fitch does not expect prices to collapse back to pre-covid levels yet, the analyst says they will continue to be under pressure in Q222 at least as Chinese demand falters under the government’s zero covid policy.

After Russia’s invasion of Ukraine and investor concerns about supply disruptions, prices have collapsed back to pre-conflict levels as Chinese lockdowns and weakening demand worked to undo most gains.

China’s zero-covid strategy and resulting strict lockdowns are severely impacting aluminium supply chains, first causing uncertainty around supply from lockdowns in producing regions, and subsequently impacting demand from end-use sectors countrywide that are impacted by lockdowns, the analyst says.

Previously, LME aluminium futures reached a record high of $4073.50/tonne in March 2022 following sanctions on Russia and security issues at the Black Sea.

Aluminium prices were on a broad upwards trajectory since the beginning of the Chinese economic recovery from covid-19 in Spring of 2020.

Prices received a further boost from the severe power crunch in China which led to aluminium smelters in the country being ordered to limit or halt production to reduce pressure on the power grid, and high energy prices and input costs (alumina and prebaked anodes) elsewhere, which squeezed smelters’ margins.

Despite high prices, global aluminium production growth will slow over the coming years, Fitch forecasts, primarily as a result of the 45ktpa capacity ceiling in China. Elsewhere, a strong medium- to long-term price outlook will incentivise producers to ramp up output, although smelters’ margins will be limited by high prices of key inputs. In the near term, Fitch expects moderate output growth, with 3% y-o-y forecast in 2022.

In the longer term, Fitch expects aluminium prices to remain elevated in the coming years, as demand is supported by the accelerating shift to a green economy. Fitch also notes that rising demand for low-carbon aluminium presents a future risk to aluminium pricing.